New York Business Litigation Lawyer Blog

The Appellate Division, Second Department recently reiterated in Citibank, Inc. v. Stosel, that to have standing to commence a foreclosure action you need to be the holder or assignee of the mortgage as well and underlying note as an “assignment of the mortgage without assignment of the underlying note or bond is a nullity.” In that case, the Court found that the plaintiff failed to demonstrate that it had standing to commence the foreclosure action as it failed to establish how or when it became the lawful holder of the note either by delivery of valid assignment of the note to it.
By Katherine Zalantis

The Appellate Division, First Department recently established that there can be no recovery on breach of contract or implied contract claims when the terms of the contract were still being negotiated. In Brennan Bee Gorman/Architects, LLP v. Cappelli Enterprises, Inc., the First Department upheld the dismissal of the claims for breach of contract and breach of implied contract.

There, plaintiff submitted a proposal for architectural and engineering services to defendants relating to a proposed resort project. Four days later, plaintiff informed defendants that it was still “working on formal agreement” but nonetheless asked defendants to give them authorization to proceed. Although defendants authorized plaintiff to start working, defendants expressly noted that plaintiff’s “proposal and associated pricing” were “still under review and . . . subject to formal agreement.” Also, although plaintiff started working on the project, the parties continued to exchange contract drafts and comments for several months and never came to an express agreement on price and other terms.

The Court found that it was evident based upon circumstances of this case that the parties never came to an express agreement on price and other terms. Accordingly, the Court found that defendants were entitled to summary judgment dismissing the claims for breach of an express contract.

As for the implied contract claims, the Court likewise found that defendants were entitled to summary judgment on these claims also. The Court emphasized that the parties never came to an express agreement on price. Also, the Court ruled that defendants’ statement that they would only be bound by a formal agreement and their repeated rejection of plaintiff’s proposed lump sum pricing overrode their act of paying for one invoice in August 2008 (that billed for work in June 2008).

On the account stated claim, the Court ruled that defendants’ consistent objection to plaintiff’s invoices required dismissal of this claim.

But on the quantum meruit claim, the Court ruled that the lower court properly declined to dismiss this claim as there were issues of fact as to whether plaintiff could have reasonably expected to be compensated for its services and the reasonable value of those services. The Court found that although the parties never reached an agreement on price, the record indicated that the defendants agreed to pay plaintiff at least some amount for its services. The Court rejected defendants’ claim that plaintiff cannot establish that defendants benefitted from the plaintiff’s services as the Court relied upon case-law establishing that it is immaterial whether any defendants in any economic senses benefitted from the performance. The Court likewise rejected defendants’ claim that plaintiff cannot establish its value of services as it did not maintain itemized billing records. The Court noted that there are other means of establishing the reasonable value of services rendered.

By Katherine Zalantis

The Appellate Division, Second Department recently established that when a claim for tortuous interference of contract fails based upon lack of factual support the derivative claim of conspiracy to interfere also must fail because under New York law the conspiracy to interfere claim is not a stand-alone claim. In Ferrandino & Son, Inc. v Wheaton Bldrs., Inc., LLC, the Second Department upheld the dismissal of the claims for tortuous interference and conspiracy to interfere.

There, plaintiff and defendant-general contractor Wheaton entered into a subcontract under which plaintiff agreed to install a concrete superstructure for a condominium complex located in Brooklyn. After Wheaton terminated the subcontract based upon plaintiff’s alleged poor performance, plaintiff commenced an action against the general contractor and the defendant project manager HE2 alleging that HE2 tortiously induced Wheaton to breach its subcontract with the plaintiff and that Wheaton and HE2 maliciously conspired together to interfere with and terminate the plaintiff's contract rights for their own benefit.

The Court established that to state a cause of action alleging tortious interference with contract, “the plaintiff must allege: the existence of a valid contract between it and a third party, the defendant's knowledge of that contract, the defendant's intentional procurement of the third party's breach of that contract without justification, and damages.” The plaintiff must specifically "allege that the contract would not have been breached but for the defendant's conduct"

While acknowledging the motion to dismiss standard requiring that a complaint be construed liberally, the Court ruled that “a plaintiff must support his claim with more than mere speculations.” The Court found that plaintiff “merely asserted, in a conclusory manner and without the support of relevant factual allegations, that HE2's actions caused Wheaton to breach the subcontract.” Also the Court ruled that plaintiff failed to “allege that, but for HE2's actions, Wheaton would have continued the subcontract.” Thus, the Court upheld the dismissal of the tortuous interference claim.

With the fall of the tortuous interference claim also fell the civil conspiracy claim. The Court ruled that “New York does not recognize civil conspiracy to commit a tort as an independent cause of action,” but rather, “the claim stands or falls with the underlying tort.” The Court ruled as the civil conspiracy claim was derivative of the underlying tort of tortious interference, that claim was also properly dismissed.

By Katherine Zalantis

In a series of recent appellate cases, the Courts have made clear that indemnification provisions in contracts cannot be construed broadly to allow parties to the contract to recover attorneys’ fees from each other. As stated by New York’s highest Court in U.S. Underwriters Ins. Co. v. City Club Hotel, in New York State “and indeed, in the rest of the country, the longstanding ‘American rule’ precludes the prevailing party from recouping legal fees from the losing party ‘except where authorized by statute, agreement or court rule’” In the seminal 1989 Court of Appeals’ decision, Hooper Assoc., Ltd. v. AGC Computers, Inc., the Court established that the indemnification clause did not require defendant in a contract dispute to reimburse plaintiff for attorney’s fees in a breach of contract action against defendant. Two recent appellate division cases reaffirmed the strict standard established by the Hooper Assoc. Court.

The Appellate Division, First Department in Gotham Partners, L.P. v. High River Ltd. Ptnership, ruled that the language of the indemnification provision in that case “falls short of satisfying the exacting standard” established by Hooper Assoc. mandating that “for an indemnification clause to cover claims between the contracting parties rather than third-party claims, its language must unequivocally reflect that intent.” The Court ruled that the indemnification clause, like the one considered by Hooper Assoc., is framed in language relevant to a third-party claim. The Court noted that the parties were well aware of how to frame an enforceable attorneys’ fees provision, but that there was not a similar provision relating to claims between the parties to the contract.

In rejecting plaintiffs’ argument that it could rely upon the general indemnification provision, the First Department ruled that “[t]he problem with plaintiffs’ position is not that their interpretation is irrational; it is that the strict standard imposed by Hooper requires more than that. For an indemnification clause to serve as an attorney’s fee provision with respect to disputes between the parties to the contract, the provision must unequivocally be meant to cover claims between the contracting parties rather than third party claims.” The Court explained that the Hooper standard “requires more than merely an arguable inference of what the parties must have meant; the intention to authorize an award of fees to the prevailing party in such circumstances must be virtually inescapable.”

Similarly, the Appellate Division, Second Department in Adesso Café Bar & Grill, Inc. v. Burton, very recently ruled that the indemnification language in the contract was “not so ‘unmistakably clear’ as to read into the contract the obligation that defendants were to indemnify plaintiffs for the attorney’s fees incurred by the plaintiffs.” There, plaintiffs and defendants entered into a contract whereby the plaintiffs purchased the leasehold and assets of defendants’ business and “[a]mong the contract’s many provisions was an indemnification” provision. After the closing, plaintiffs commenced an action for breach of contract, fraud and material misrepresentation arising from defendants’ alleged numerous material representations and sought an award of its attorneys’ fees.

In affirming the lower court’s denial of the request for attorneys’ fees, the Second Department extensively cited from the holding in Hooper Assoc. The Second Department ruled that its determination that the contract’s indemnification language was “not so ‘unmistakably clear’ as to read into the obligation” that defendants were to indemnify the plaintiffs for their attorneys’ fees in prosecuting the action against defendants, was “bolstered by the fact that the provisions within the second part of the contract’s indemnification clause, entitled “Procedure” are inconsistent with a lawsuit between the parties themselves.” Thus, the Second Department ruled that “[w]here ‘the language of the parties is not clear enough to enforce an obligation to indemnify, [the courts] are unwilling to rewrite the contract and supply a specific obligation the parties themselves did not spell out.”

Thus, based upon these two recent appellate cases, it is clear that an indemnification provision must be “unmistakably clear” to also relate to claims between the parties and not simply the typical third-party claims.

By Katherine Zalantis

The Second Department ruled that the Garrision School District was not required to school for free non-resident children living in a private child care facility. Board of Education of the Garrison Union Free School District v. Greek Archdiocese of St. Basil involved a private child care facility known as the Greek Archdiocese Institute of St. Basil (“St. Basil”), which was established in 1944 and primarily houses Greek Orthodox children whose parents are deceased or unable to care for them, and many of the children are disabled. Children are placed there through the efforts of parish priests as opposed to government agencies. St. Basil operated its own School until 1997, at which point the school closed and St. Basil sent its children to schools outside of the Garrision school district on a tuition-paying basis. Permission to place a child at St. Basil’s may be revoked by the child’s parent or guardian and St. Basil had not been appointed guardian for any of the children at issue.

In 2002, St. Basil attempted to enroll its children in the Garrison school district and the was hearing officer determined, which was affirmed by the State Education Commissioner, that no child living at St. Basil at that time was a resident of the Garrison school district.

In 2006, St. Basil received a license from the State to operate a residential child care institution. While St. Basil’s license limited the number of beds to 30, St. Basil can accommodate up to 108 children. As part of the education plan, St. Basil stated that it would pay tuition costs for its children to attend schools outside of the Garrison school district unless it was determined that the Garrison school district was responsible for the costs.

St. Basil’s operating license prompted the Garrison school district to bring this action seeking a judgment that St. Basil’s status as a licensed child care institution did not require the Garrison school district to pay to the costs for educating St. Basil’s children. St. Basil counterclaimed seeking a judgment that the Garrison school district was responsible.

The Court rejected St. Basil’s reliance upon Education Law § 4002(1). Although this section carves out an exception for children in child care institutions to the residency requirement of Education Law § 3202, the Court ruled that this exception did not extend to children who are not residents of the state or who are privately placed in child care institution regardless of residency.

The Court explained that the statute (Education Law § 4002) must be read as a whole and that the remainder of this statute provides a comprehensive tuition payment scheme for resident children who are placed in child care institution by government entities. The Court ruled that Education Law § 4002 is designed to allocate costs sensibly and avert burdening school districts with the cost education non-resident children. The Court concluded that “[a] finding that the plaintiff must provide tuition-free educations to nonresident St. Basil children, who come from all of the country and over whose private placements the plaintiff has no control, would severely penalize the plaintiff and would not comport with legislative intent.”

By Katherine Zalantis

Noting that it was “once again asked to determine the obligation of an insurer to defend and indemnify,” New York highest court ruled that an additional insured was entitled to defense and indemnification. In Regal Constr. Corp. v. National Union Fire Ins. Co. of Pittsburgh, New York City hired URS Corporation (URS) as the construction manager for a Rikers Island renovation project and URS hired Regal Construction Corp. (Regal) to be the main demolition, renovation and other contractor. Under the agreement between URS and Regal, Regal had to obtain a commercial general liability (CGL) insurance policy naming URS as an additional insured. Regal obtained a CGL insurance policy from plaintiff Insurance Corporation of New York (INSCORP) that named URS as an “additional insured” and covered URS only with respect to liability “arising out of” Regal’s ongoing operations performed for URS.

In March 2001, Regal’s project manager, Ronal LeClair, stepped onto a floor joist (to indicate a wall that needed to be demolished) and according to LeClair, the joint had been recently painted and the paint caused LeClair to slip and injure his back. LeClair alleged that an unnamed person from URS told him that URS employees had painted the joist.

In 2003, LeClair commenced a personal injury action against the City and URS. While LeClair did not name his employer, Regal, as a defendant, URS forwarded a copy of the complaint to Regal and to its insurer, INSCORP, demanding defense and indemnification based upon the additional insured clause of the CGL policy. Ultimately, Regal and INSCORP commenced a declaratory judgment action against URS and its insurer seeking a declaration that URS Was not entitled to coverage as an additional insured under the INSCORP policy.

The Court of Appeals ruled that an insurer’s duty to defend its insured is “exceedingly broad” and that an insurer must provide a defense “whether the allegations of the complaint suggest . . a reasonable possibility of coverage.” In other words, if the complaint contains any facts or allegations which bring the claim “even potentially within the protection purchased, the insurer is obligated to defend.”

The Court of Appeals found that the additional insured endorsement provided that URS was an additional insured “only with respect to liability arising out of [Regal’s] operations].” Although Regal and INSCORP claimed that LeClair’s injury did not arise for Regal’s demolition and renovations operation but from URS’ employees’ painting of the joist, the Court of Appeals ruled that “the focus of the inquiry ‘is not on the precise cause of accident but the general nature of the operation in the course of which the injury was sustained.’” As the Court of Appeals found that the injury “arose out of” Regal’s operation notwithstanding URS’s negligence, the injury fell within the scope of the additional insured clause of the insurance policy.

The Court of Appeals said its decision was factually distinguishable from its prior decision in Worth Const. Co., Inc. v. Admiral Ins. Co., 10 N.Y.3d 411, because in this case, there was “a connection between the accident and Regal’s work, as the injury was sustained by Regal’s own employee while he supervised and gave instructions to a subcontractor regarding work to be performed.” Consequently, the Court ruled that the fact that the underlying complaint alleged negligence on URS’s party and not Regal was of “no consequence” as URS’s potential liability for LeClair’s injury “arose out of” Regal’s operation and therefore, URS was entitled to a defense and indemnification.

By Katherine Zalantis

In a matter of first impression, the United States Court of Appeals for the Second Circuit ruled that where a Court has before it the two works in question in a copyright infringement action, a Court could rule on the similarly between those works on a motion to dismiss. In Gaito v. Simone Development Corp., the City of New Rochelle in August 2004, issued Request for Development Proposals “seeking to identify a real estate development team for the mixed-use development” of a 178-acre parcel of land known as the Church Street Project. Plaintiff-architect Gaito (referring both to the firm and principal member) and defendant Simone Development Corp. jointly submitted a response, Gaito designed and drafted architectural plans and in November 2004, Gaito (along with the Simone Defendants) submitted a completed design proposal. After New Rochelle awarded the Church Street Project to the group in March 2005, Gaito registered its plans with the United States Copyright Office. Subsequently, a dispute arose concerning Gaito’s compensation and the Simone Defendants terminated their relationship with Gaito and instead retained the services of the architectural and planning firm of SLCE Architects (SLCE) and the planning firm of Saccardi & Schiff, Inc. to continue the project.

The crux of Gaito’s Amended Complaint was that defendants unlawfully used Gaito’s copyrighted design for the Church Street Project without Gaito’s authorization and that SLCE developed a “re-design” for the project based on Gaito’s original design. Specifically, the Amended Complaint alleged 35 similarities between Gaito’s designs and SLCE’s re-design. Accordingly, Gaito alleged violations of the Copyright Act, 17 U.S.C. § 101 et. seq., and also alleged New York State law claims of quantum meruit and unjust enrichment. Defendants moved to dismiss the Amended Complaint under Rule 12(b)(6) (failure to state a claim).

The Second Circuit explained that “to establish a claim of copyright infringement, ‘a plaintiff with a valid copyright must demonstrate that: (1) the defendant has actually copied the plaintiff’s work; and (2) the copying is illegal because a substantial similarity exists between the defendant’s work and the protectable elements of plaintiff’s.” For purposes of the motion to dismiss the Second Circuit (and the lower court) assumed that actual copying by defendants had occurred. Thus, the issue was whether there was a “substantial similarly” between SLCE’s design for the Church Street Project and the protectable elements of Gaito’s design.

The Second Circuit stated that it had not “directly addressed” the threshold issue – namely, whether it was proper for the District Court to made a determination as to substantial similarly on a Rule 12(b)(6) motion to dismiss. On this threshold issue, the Second Circuit ruled that “where, as here, the works in question are attached to a plaintiff’s complaint, it is entirely appropriate for the district court to consider the similarly between those works in connection with a motion to dismiss, because the court has before it all that is necessary in order to make such evaluation.” Acknowledging that there “can be certain instances of alleged copyright infringement where the question of substantial similarity cannot be addressed without the aid of discovery or expert testimony,” the Second Circuit warned that “[n]othing in this opinion should be read to upset these settled principles, or to indicate that the question of non-infringement is always properly considered at the pleadings stage without the age of discovery.”

Turning next to the issue of whether the District Court erred in resolving the question of substantial similarly in defendants’ favor, the Second Circuit ruled that the “works in question here unequivocally demonstrates the utter lack of similarity between the two designs.” In so ruling, the Second Circuit “disavowed any notion that ‘we are required to dissect [the works] into their separate components, and compare only these elements which are in themselves copyrightable’” and instead ruled that they are “principally guided ‘by comparing the contested designs ‘total concept and overall feel’ with that of the alleged infringed work.” The Second Circuit noted that the original design consisted of three structures, while the re-design consisted of a single structure and that the connection to pedestrian plazas were different in both designs. After finding that the “overall visual impressions of the two designs are entirely different,” the Second Circuit ruled that “we confidently conclude that no ‘average lay person would recognize the alleged copy as having been appropriated from the copyrighted work.’”

By Katherine Zalantis

New York’s highest court has ruled that the tax benefit program’s exemptions and abatements did not extend to the cooperative’s commercial tenant. In Barnan Assoc. v. 196 Owners Corp., the commercial-tenant Barnan Associates entered into a lease in 1979 with the then-landlord Robert Olnick Associates requiring the commercial tenant to pay 14.5% of the increase in real estate taxes paid over and above the base real estate taxes. After the lease was executed, Robert Olnick Association sponsored the building’s cooperative conversion and by 1981, the corporation was the building’s owner and landlord. More than a decade later, New York State enacted certain tax benefits targeting cooperative tenant-shareholders.

Since the 1998-1999 tax year, the tenant-shareholders have benefitted from a certain tax program under Real Property Law §§ 425 and 467-a, which come in the form of tax abatements and exemptions. In 2005, Barnan became aware that since the 1998-99 tax year, its yearly 14.5% share of the building’s billable taxes included the tenant-shareholder’s tax abatements and exemptions. Barnan claimed that it had been overcharged in tax rents as the corporation failed to deduct the tax abatements and exemptions paid to the tenant-shareholders from its proportionate tax liability and ultimately commenced this action to obtain reimbursement.

The Court of Appeals ruled that the terms of the lease determined whether Barnan was entitled to deduct the relevant tax abatements and exemptions from its tax rents. The Court found that the tax escalation clause “unambiguously states that the additional tax charged to Barnan applies to ‘any increase in such real estate taxes’ on the land greater than the ‘base amount of real estate taxes.’” The Court noted that the base amount is determined with reference to the defined term “base amount of real estate taxes,” which the lease required to be calculated “without regard or giving effect to any exception or abatement.”

The Court, therefore, ruled that it would be “illogical” to give effect to exemptions or abatements in calculating “the ‘increase in such real estate taxes’ and the resulting escalation.” The Court further noted that the tax benefit program did not decrease the corporation’s tax liability. Thus, the Court of Appeals reversed the appellate court and ruled that the corporation “properly increased Barnan’s rent pursuant to the tax escalation by 14.5% of the increase in real estate taxes, including the amount the corporation was required to pay the eligible tenant-shareholders pursuant to the tax benefit program.”

By Katherine Zalantis

The United States Court of Appeals for the Second Circuit ruled that that a law-firm (and the individual attorneys) violated the Fair Debt Collection Practices Act (“FDCPA”) by starting a lawsuit to collect a debt during the 30-day validation period allowed to dispute a debt without any explanation of the relationship between the notice validation rights and the lawsuit. In Ellis v. Solomon and Solomon, P.C., the plaintiff Janet Ellis (“Ellis”) owed $17,809.13 to Citibank credit card and Citibank referred the matter to the defendant law firm with “authorization to sue.” As required by the FDCPA, the law firm sent Ellis a letter containing a “validation notice”, setting forth, among other things, the consumer’s right to dispute the debt by notifying the law firm within 30-days. The law firm then started a lawsuit in Connecticut Superior Court to collect the debt and Ellis was personally served with the summons and complaint when there was more than two more weeks to run on the 30-day validation period.

Ellis, in turn, filed a lawsuit against the law firm and the individual attorneys alleging violations of the FDCPA. After both sides moved for summary judgment, the District Court ruled that the defendants violated the FDCPA by serving Ellis with a lawsuit during the validation period. On appeal, the Second Circuit agreed.

The Second Circuit explained that the 30-day validation period is not a “grace period” and debt collectors are largely free to continue collection activities during the validation period provided that the “validation period collection activities and communications must not ‘overshadow’ or ‘contradict’ the validation notice.” And a collection activity or communication “overshadows or contradicts to the validation notice ‘if it would made the least sophisticated consumer uncertain as to her rights.’”

The Second Circuit ruled that there is “still the real potential for confusion when the consumer is served with a lawsuit during the validation period.” Without any kind of an explanation of the relationship between the validation notice and the lawsuit, it “may well appeal to the least sophisticated consumer that being taken to court trumps any other out-of-court rights. . . .”

Stating that “we write principally to explain how debt collectors could avoid running afoul” of the FDCPA in the future, the Second Circuit explained that the law firm had two options.

First, it could have waited until the validation period expired – the Court noted that it was “difficult to discern what tactical advantage was gained” by starting the lawsuit when the validation period had only two weeks to run, especially when the return date of the lawsuit was a full month after the validation period expired.
Second, if the law firm chose not to wait until the end of the validation period to start the litiation, it could have proceeded with the litigation provided it explained the lawsuit’s impact “– or more accurately, lack of impact – on the disclosures made in the validation notice.” The Court explained that this explanation should be set forth either on the validation notice itself or in a notice provided with the summons and complaint with the “best practice” being to provide an explanation in both the validation notice and the summons and complaint. The Second Circuit explained that “[c]larifying that commencement of a lawsuit does not trump the validation notice will come at little or no cost to debt collectors and will ensure that the consumer rights secured under the FDCPA are not overshadowed or contradicted.”

While awarded $1,000 is statutory damages, the Plaintiff was also awarded costs and attorneys’ fees, which no doubt will be more than $1,000.

By Katherine Zalantis

The Appellate Division Second Department has ruled that there was not sufficient “assent” to require a law firm to pay a recruiting firm’s fee when the resume was sent to a partner in the firm’s New York office, but the candidate was independently interviewed and hired by the firm’s Washington D.C. office. In Siven-Tobin Assoc., LLC v. Akin Gump Strauss Hauer & Feld LLP, the plaintiff-recruitment firm sent, via e-mail, a resume of a potential employee specializing in Korean practice to a partner in the defendant-law firm’s New York office. The attached term sheet described the anticipated fee for the attorney placement and further provided that “[t]he interviewing of any attorney submitted to the firm will constitute acceptance of these terms and conditions unless [plaintiff] is notified to the contrary in writing prior to the first interview.” The New York partner had no recollection of receiving the e-mail, but in any event, the resume was of no interest to the partner as the New York office did not have a Korean practice group. Nonetheless, nine days later, a partner in the defendant firm’s Washington D.C. office (which has a Korean practice group) received the same candidate’s resume from another recruitment firm. The Washington D.C. partner was unaware of plaintiff’s e-mail to the New York partner and the Washington D.C. partner, after interviewing and hiring the attorney, paid a placement fee to the other recruitment firm.

Plaintiff started its lawsuit alleging that it was entitled to be paid a placement fee. Plaintiff claimed that there was an “implied-in-fact” agreement between the parties.

The Court did not agree – the Court explained that for there to be an implied contract to pay for personal services, plaintiff must prove that services were performed and accepted with the “understanding on both sides that there was a fee obligation.” The Court focused on the facts that the New York partner did not know that the candidate was being interviewed by the Washington office and the Washington D.C. partner did not know before interviewing the candidate that his resume had been sent to the New York partner. Thus, there was not the required “assent” sufficient to establish an implied contract.

The Court also established that an implied contact could not be inferred based upon the parties’ prior conduct as the law firm never hired any of the 10 candidates referred to it over the course of 10 years. Further, the Court found that the “mere fact that defendant interviewed three of those candidates does not permit an inference that defendant had agreed to pay plaintiff a placement fee even in instances where plaintiff’s efforts played no role in defendant’s decision to interview and hire the candidate.”

By Katherine Zalantis

Even though the defendant remitted to the Court (but not the plaintiff) more than the amount necessary to redeem the property before the foreclosure sale, the Court of Appeals ruled that the property owner did not properly stay the sale nor did it exercise its right to redeem. In NYCTL 1999-1 Trust, et. al., v. 573 Jackson Ave. Realty Corp., the defendant 573 Jackson Avenue Realty Corp. (“Jackson”) failed to pay certain real property taxes on its property located in the Bronx and in May 1999, the plaintiff Trust acquired a tax lien against the property in the amount of $2,412.75 from the City of New York. Although nearly three years later, Jackson paid that amount to the Trust, the lien was not discharged because statutory interest had accrued in the interim and the interest amount remained unpaid.

The Trust commenced an action to recover the balance owed, including interest and attorneys’ fees. The Supreme Court granted summary judgment in favor of the Trust and appointed a referee to calculate the total amount owed, which was done by the referee and the Supreme Court ultimately confirmed the referee report awarding the Trust $9,307.50. A judgment of foreclosure and sale was entered in May 2007 and Jackson appealed from said judgment.

The foreclosure sale was scheduled for August 24, 2007 and a week before the sale, the Trust forwarded a payoff letter to Jackson indicating that the sum of $19,070.74 could be paid to redeem the property prior to sale. Instead of remitting full payment to the Trust, Jackson deposited $19,563.77 with the Bronx County Clerk on August 16, 2007. Jackson advised the Trust that it had filed an undertaking with the County Clerk that “stayed” the foreclosure sale. The sale, however, proceeded and the third party bought the parcel with a high bid of $160,000.

Subsequently, Jackson moved the cancel the foreclosure sale and to enjoin the referee from conveying title the to third-party claiming that property had been sold in violation of CPLR 5519 and RPAPL 1341. The Supreme Court denied the motion, the Appellate Division affirmed both the foreclosure judgment and the Supreme Court’s denial of the motion and the Court of Appeals granted leave to appeal.

First, the Court of Appeal ruled that Jackson’s deposit of $19,563.77 with the Bronx County Clerk did not automatically stay the sale under CPLR § 5519(a)(2) and (a)(6). The Court reasoned that CPLR 5519(a)(2) is relevant only where “the judgment or order directs payment of a sum of money” and therefore is not applicable to a foreclosure judgment. Also, the Court ruled that Jackson could not rely upon CPLR 5519(a)(6) as its “undertaking was not ‘in a sum fixed by the court’ as required by that provision.”
Turning next to Jackson’s claim that there was a stay under RPAPL 1341, the Court of Appeals noted that the Appellate Division found that this provision did not apply as the provision was not self-executing and requires that a court order the stay. The Court of Appeals, however, ruled that “we reject Jackson’s argument for a more fundamental reason – RPAPL 1341 simply had no application here.”

The Court of Appeals cited the relevant portion of RPAPL 1341 as follows:

Where an action is brought to foreclose a
mortgage upon real property upon which any
part of the principal or interest is due, and
another portion of either is to become due,
and the defendant pays into court the amount
due for principal and interest and the costs
of the action, together with the expenses of
the proceedings to sell, if any, the court
shall:
. . .
"2. Stay all proceedings upon judgment, if
the payment is made after judgment directing
sale and before sale; but, upon a subsequent
default in the payment of principal or
interest, the court may make an order
directing the enforcement of the judgment for
the purpose of collecting the sum then due.

The Court of Appeals ruled that RPAPL 1341 is, “by its plain terms,” limited to partial foreclosures. The Court noted that in typical mortgage foreclosure cases, after a default, the entire balance is accelerated and immediately due and consequently, there is no portion that is “to become due” in the future. Thus, the Court of Appeals ruled that since the action to foreclose the Trust’s tax lien does not involve a partial foreclosure, RPAPL 1341 was inapplicable.

Nonetheless, the Court of Appeals noted that although RPAPL 1341 does not apply outside the partial foreclosure context, recent Appellate Division cases have “engrafted that statute’s requirements onto a property owner’s common-law right of redemption.” The Court explained that “[t]he equity of redemption, which long predates the RPAPL, allows property owners to redeem their property by tendering the full sum at any point before the property is actually sold at a foreclosure sale.” All that is required is “an unconditional tender of the full amount due.”

But this is not what occurred in this case – the Court of Appeals noted that Jackson conceded that it only sought to stay the sale through its deposit with the County Clerk and that it did not tender the sum to the Trust. Jackson informed neither the Court nor the Trust that it was making full payment to redeem the property. Rather, Jackson informed the Trust that its deposit “stayed the sale.” As Jackson did not “redeem the property by unconditionally tendering the total amount owed,” the Court ruled that the property was properly sold at auction.

By Katherine Zalantis

The Appellate Division, Second Department ruled that even though the defendant waived their setoff rights in the mortgage, the Court ruled that defendant was entitled to a setoff as the possession agreement “executed on the same day, by the same parties, and for the same purpose” provided for a setoff. In Hoffinger Indust., Inc. v. Alabama Realty, Inc., the plaintiff conveyed real property located at 966-988 Alabama Avenue in Brooklyn, New York to defendant and the purchase was financed, in part, by a mortgage with rider and a mortgage note both executed on November 19, 1998 by Defendant requiring that payment be made to Plaintiff through November 19, 2018. The mortgage rider provided standard language that the defendant waived its right to interpose defenses or setoff whatsoever.

Also executed on that same date (November 19, 1998) was: (i) a personal guaranty by defendant’s sole stockholder and officer, Joseph Berkovitz; and (ii) a possession agreement between Berkovitz and plaintiff that allowed plaintiff to keep certain equipment on the premises and required that plaintiff pay rent after the equipment remained for more than six months. The possession agreement specifically provided that any equipment remaining after two years “shall be removed at the cost of [the plaintiff] which may be offset against mortgage payments to [the plaintiff].”

After the defendant admittedly defaulted on the mortgage by failing to make payments, plaintiff commenced a mortgage foreclosure action. Defendant and Berkovitz counterclaimed, seeking an offset against the balance due for unpaid rent for the equipment left at the property. The counterclaim was subsequently amended to conform to the proof at the nonjury trial, allowing them to seek an offset for the cost of removing the equipment.

The Supreme Court ruled that while the balance owed on the mortgage was $821,976.24, defendant was entitled to offset for the cost of removing the equipment in the amount of $220,000. The Appellate Division, Second Department ruled that the Supreme Court properly determined that defendants were entitled to an offset. The Court ruled that “[e]ven though the defendants waived their right to interpose an offset in the rider annexed to the mortgage agreement, the rider must be viewed together with the possession agreement, which provided for an offset, since these documents were executed on the same day, by the same parties, and for the same purpose.”

The Second Department also ruled that the Supreme Court acted within its discretion in ruling on the cost to remove the equipment; in calculating the default interest owed; and in deducting the offset from the principal amount due prior to calculating the default interest owed “since the obligation to remove the equipment arose before the defendants defaulted on the mortgage by failing to make payments.”

By Katherine Zalantis